How does an inverted Dead Cat Bounce work

An inverted Dead Cat Bounce is the exact opposite of the Dead Cat Bounce. A quick look is that if a trader owns a stock after a quick and large (5-20%) gain, there is normally a gap up. If you sell the next day after the gap-up day, then you lock up gains as prices normally start to fall before starting a new move upwards (Bulkowski, 2005). The inverted dead cat bounce will occur when a company reveals news that will cause the stock to skyrocket by 5% to 20% or maybe even higher. This event is not caused by buyout news because that pattern of events indicates that a stock is going up and staying up. Instead, the inverted dead cat bounce is often earnings related or due to positive results from clinical drug trials, resolution of patent disputes, legal awards, contract wins, oil patch discoveries, etc. After a price rises upward, it will often fall back within a week or two. A frequency distribution of price momentum over time shows that less than half of stocks will make a higher high the day after the announcement. But you can put a limit order to sell at the previous day’s high and see if it hits. You will want to trade off the exit, if possible, to maximize your profit.

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